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The effect of the global financial crisis on OECD potential output

Author

Listed:
  • Patrice Ollivaud
  • David Turner

Abstract

Potential output losses from the global financial crisis are estimated by comparing recent OECD published projections with a counter-factual assuming a continuation of pre-crisis productivity trends and a trend employment rate which is sensitive to demographic trends. Among the 19 OECD countries which experienced a banking crisis over the period 2007-11 the median loss in potential output in 2014 is estimated to be about 5½ per cent, compared with a loss in aggregate potential output across all OECD countries of about 3½ per cent. The loss does, however, vary widely across countries, being more than 10% for several smaller European, mainly euro area, countries. The largest adverse effects come from lower trend productivity, which is a combination of both lower total factor productivity and lower capital per worker. Despite large increases in structural unemployment in some countries, the contribution of lower potential employment is limited because the adverse effect on labour force participation is generally much less than might have been expected on the basis of previous severe downturns. This may partly reflect pension reforms and a tightening up of early retirement pathways. Pre-crisis conditions relating to over-heating and financial excesses, including high inflation, high investment, large current account deficits, high total economy indebtedness and more rapid growth in capital-per-worker are all correlated with larger post-crisis potential output losses. This suggests that underlying the potential output losses was a substantial misallocation of resources, especially of capital, in the pre-crisis boom period. On the other hand, more competition-friendly product market regulation is associated with smaller losses of potential output, suggesting that it facilitates a reallocation of resources across firms and sectors in the aftermath of an adverse shock and so helps to mitigate its consequences.JEL classification: E32; E44. Keywords: Banking crisis, financial crisis, global financial crisis, potential output.

Suggested Citation

  • Patrice Ollivaud & David Turner, 2015. "The effect of the global financial crisis on OECD potential output," OECD Journal: Economic Studies, OECD Publishing, vol. 2014(1), pages 41-60.
  • Handle: RePEc:oec:ecokac:5js64l2bv0zv
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    File URL: http://dx.doi.org/10.1787/eco_studies-2014-5js64l2bv0zv
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    Cited by:

    1. de Ridder, Maarten, 2016. "Investment in productivity and the long-run effect of financial crises on output," LSE Research Online Documents on Economics 86180, London School of Economics and Political Science, LSE Library.
    2. repec:ipf:psejou:v:41:y:2017:i:2:p:159-205 is not listed on IDEAS
    3. Patrice Ollivaud & Yvan Guillemette & David Turner, 2016. "Links between weak investment and the slowdown in productivity and potential output growth across the OECD," OECD Economics Department Working Papers 1304, OECD Publishing.
    4. repec:eee:ecofin:v:43:y:2018:i:c:p:54-70 is not listed on IDEAS
    5. Wilms, Philip & Swank, Job & de Haan, Jakob, 2018. "Determinants of the real impact of banking crises: A review and new evidence," The North American Journal of Economics and Finance, Elsevier, vol. 43(C), pages 54-70.
    6. Masuch, Klaus & Moshammer, Edmund & Pierluigi, Beatrice, 2016. "Institutions and Growth in Europe," CEPS Papers 11482, Centre for European Policy Studies.
    7. repec:kap:atlecj:v:45:y:2017:i:3:d:10.1007_s11293-017-9551-9 is not listed on IDEAS
    8. repec:spr:anresc:v:60:y:2018:i:2:d:10.1007_s00168-017-0828-3 is not listed on IDEAS

    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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